Too Many Funds, Too Few Companies: The Bubble In African Private Equity

A bubble may be forming in sub-Saharan Africa’s emerging private-equity market because too many funds are targeting a small number of companies capable of absorbing international investment, according to a new report.

Private-equity firms in sub-Saharan Africa have an excess of $4 billion which they are seeking to invest, according to the Overseas Development Institute, an independent research group based in London.

Purchase prices for companies are rising as private-equity firms compete to buy them, according to ODI researcher Judith Tyson.

“The region is suffering from an ‘overhang’ of unused capital because of the lack of suitable companies for investment. Firms are too small, lack human capital and are often within underdeveloped sectors,” Tyson, a former banker at Deutsche Bank AG, wrote in a report. “This could contribute to emerging asset bubbles.”

Africa’s high-risk markets have started to attract the world’s biggest private-equity firms, including New York-based KKR & Co. which bought an Ethiopian rose farm last year, and Washington-based Carlyle Group whose investments include a Nigerian bank.

The bubble fears come even though the continent accounted for just 1.47 percent of the $438 billion of private-equity deals in 2014. But the pace of growth is rapid. Last year’s $6 billion of African deals was almost triple the previous year’s total, according to research group Preqin.

There are only 3,187 companies across Africa with revenue of more than $50 million, and almost half of those are in South Africa, Diana Noble, CEO of London-based emerging markets investment firm CDC Group PLC said at an African private equity conference last year.

Private-equity firms can avoid bubbles in Africa by funding rapidly-growing companies, rather than competing in auctions to buy assets, said Andrew Brown, the chief investment officer of Emerging Capital Partners, a private-equity firm that manages more than $2 billion in Africa.

“Africa is not a buyout market. It’s a growth capital market. What Africa needs is investment into the businesses,” Brown said in an interview. “The landscape can change very quickly if you can create platforms capable of absorbing capital.”

“New policy approaches are needed to create more investible companies, not more investment funds,” Tysone wrote in the report. “There is a need for mass business education and work experience to develop a more skilled labor force.”